For those living in the UK on a temporary basis and who consider another country home, the concept of domicile will be key to their tax position while resident in the UK. The rules here are detailed and have changed a number of times resulting in unexpected issues for taxpayers.
We have therefore summarised the key things to be aware of in the page below.
Additional Inheritance Tax Resources
What is Domicile?
Domicile is a legal concept, rather than a tax one. It does not have an exact definition. It is often described as a person’s permanent home and the place in which they have their closest ties. There are three types of domicile, as follows:
- Domicile of origin – This is acquired at birth and usually follows that of the individual’s father
- Domicile of dependency – If an individual is dependent on someone else, their domicile follows that of the person they are dependent on
- Domicile of choice – An individual may be able to change their domicile during their lifetime which is known as acquiring a domicile of choice
What is Non-Domicile?
It’s in essence the inverse of Domicile. In context, someone is deemed Non-Domicile, in a sentence such as:
‘S/he is non-domiciled in the UK’ (meaning, s/he doesn’t legally consider their current country of residence as their ‘permanent’ home and one in which they pay tax on certain aspects of their income).
Remittance Basis and Domicile
Individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains (on an arising basis).
Individuals who are UK resident but non-UK domiciled may be able to make a claim for the remittance basis.
Where a remittance basis claim is made, the individual is taxed on UK source income and gains but is only taxed on non-UK source income and gains to the extent that these are remitted (i.e. brought to) the UK.
Implications of Domicile for Long-Term Residents
Initially there is no charge for making a remittance basis claim (although it results in the loss of the individual’s personal allowance and capital gains tax annual exemption).
Where an individual remains UK resident long term, the following rules apply:
- Once the individual has been resident in the UK for 7 out of the previous 9 tax years, a £30,000 charge
- This is known as the Remittance Basis Charge (RBC) and is payable in order to access the remittance basis
- The RBC increases to £60,000 where the individual has been resident in the UK for 12 out of the previous 14 tax years
- Once the individual has been resident for 15 out of the previous 20 tax years, they become deemed domiciled in the UK and it is no longer possible to make a claim for the remittance basis. This is known as ‘Condition B deemed domicile’
- If an individual is born in the UK with a UK domicile of origin, leaves the UK and acquires a non-UK domicile of choice, whenever that individual is UK resident, they will be considered to be deemed domiciled in the UK and therefore unable to make a remittance basis claim. This is known as ‘Condition A deemed domicile’
Automatic Remittance Basis
Where a UK resident, non-UK domiciled individual’s unremitted non-UK income and gains are less than £2,000 in a tax year, the remittance basis applies automatically. Where this is the case:
- There is no loss of the personal allowance and annual exemption
- There is no need to pay the RBC where the individual is a long term resident
- Access to the remittance basis under this rule is still available once the individual becomes deemed domiciled
What Constitutes a Remittance?
A taxable remittance arises where property which consists of or derives from non-UK income or gains is brought to the UK for the benefit of a ‘relevant person’ or where the property is used to provide a service in the UK for a relevant person. Remittances can also occur where non-UK income or gains are used in relation to a debt which provides a UK person with a benefit.
A ‘relevant person’ is broadly defined as :
- The individual
- The individual’s spouse/co-habiting partner
- A child or grandchild of the individual or their spouse/co-habiting partner
- A trust of which the individual or another relevant person is a beneficiary
Some examples of remittances are:
- Transfers cash or other property, such as a piece of art or sculpture, to the UK by or for the benefit of a relevant person where the cash or the property consists of or is derived from non-UK income or gains
- Using a service in the UK which is paid for using non-UK income or gains
- Using a credit card in the UK which is paid from an account containing non UK income and gains
- Borrowing money outside the UK and using it to purchase goods or services in the UK
Whilst non-UK income and gains remitted to the UK are taxable, remittances of ‘clean capital’ are not. There are various types of clean capital, for example, bona fide gifts received from others, inheritances and non-UK funds which arose prior to an individual becoming UK resident.
Mixed funds are usually back accounts which contain a mix of various types of income or gains. The legislation on mixed funds sets out the order in which they are deemed to have been remitted. Very broadly this is:
- UK employment income
- Foreign employment income
- Other foreign income
- Foreign capital gains
- Clean Capital (this category includes other UK taxed income including self employment or partnership income)
The idea being that the funds being remitted are taxed at the highest rate first with a specific exception for UK employment income.
Although mixed funds will usually be bank accounts, they may be, for example, an investment account or an individual asset which has been purchased using overseas funds. When the asset is remitted, the different types of income, gains and clean capital used to purchase the asset are deemed to have been remitted.
How to Decide Whether to Claim the Remittance Basis
There are various things to think about when deciding whether to make a claim for the remittance basis.
- The main question is, which option out of paying tax on the arising basis or making a claim for the remittance results in the lower overall UK tax bill. If it is not immediately obvious, a calculation should be prepared comparing the two options to determine which is cheaper.
- The individual should consider whether they will need to bring offshore income and gains to the UK in the short term in order to meet their UK spending requirements. If they do then this might negate the benefit of making a remittance basis claim. It may be more cost effective to be taxed on the arising basis. Which would enable the individual to bring their offshore income and gains to the UK without a further tax charge.
- The individual should consider what foreign tax credits are available to be claimed in the UK against UK tax on their foreign income. It may be that there is not substantial additional UK tax to pay by being taxed on the arising basis as a result of foreign tax credits available to reduce the UK tax due on their foreign income or gains. This may be especially true for US taxpayers as they are taxable in the US on their worldwide income and gains.
- The UK tax on foreign income and gains remitted by a remittance basis user may however also be able to be reduced by foreign tax credits. This should be factored in to the calculation.
- An individual may also want to consider their reporting obligations. By being taxed on the arising basis the individual will need to report all their non-UK income and gains. This may be a time consuming and costly exercise which would not be necessary by making a claim for the remittance basis.
Overseas Workdays Relief
Non-UK domiciled individuals who come to the UK to work may be able to make a claim for Overseas Workdays Relief (OWR).
The relief is beneficial where the individual has one contract of employment and performs UK and non-UK duties. Where a claim is made, the proportion of the individual’s employment income which relates to their UK duties is taxable in the UK. The proportion which relates to their non-UK duties is taxable in the UK on the remittance basis i.e. only if some or all of this proportion is remitted to the UK. In order to qualify the individual:
- Must be resident in the UK
- They must make a claim for the remittance basis
- Must have an employment which consists of UK and non-UK workdays
The relief can only be claimed in the first three tax years that the individual is UK resident.
Where a non-UK bank account is used to receive essentially just salary payments and this account had a balance of £10 or less when the first salary payment was received, this account can be nominated on an individual’s annual self assessment tax return and the ‘special mixed fund’ rules can be used.
In summary, these rules simplify the analysis required when making a remittance to the UK from this mixed fund account. They allow the mixed fund rules described above to be applied to the total amount remitted to the UK in the tax year and the mixed fund analysis to be based on the amounts deposited in to the account during the whole of the tax year. This is opposed to having to consider the composition of the account at the point of each payment to the UK.
It is important where the special mixed fund rules are being used that care is kept to ensure the nominated account isn’t considered to be tainted with other forms of income. If it is, the mistake must be rectified within the required timeframes. It is also important that the nominated account is reviewed at the end of each year so that it remains in the most tax effective position at the beginning of the new tax year.
Business Investment Relief
Non-UK domiciled individuals who remit non-UK income and gains to the UK and use these funds in respect of a qualifying investment are not taxable in the UK on these remittances, provided certain conditions are met. This is known as Business Investment Relief (BIR).
- The investment must be made into an eligible private trading company, not listed on a recognised stock exchange
- The funds must be invested within 45 days of being brought to the UK
- If certain ‘chargeable events’ take place, the funds used can become taxable remittances, for example:
- The company ceases to be an eligible trading company
- The person that made the investment disposes of their holding
There are various other types of chargeable events that cause the remittance to become taxable. If a chargeable event occurs, the individual is able to take certain mitigation steps to stop the remittance from being taxable, for example, taking the funds back offshore.
Overseas Capital Loss Election
Ordinarily, an individual who makes a claim for the remittance basis is unable to use their non-UK capital losses to set against their capital gains as it is not possible to remit a loss. It is possible to make an election which enables the use of non-UK losses.
The individual’s circumstances must be considered carefully as making or not making an election could make a significant difference to their UK tax liability.
Once a claim is made, all losses (UK and non-UK) are set off in a particular order as follows:
- Non-UK gains arising in the tax year which are remitted in the same tax year
- Non-UK gains arising in the tax year which are not remitted in the same tax year
- UK gains arising in the tax year
The following should be noted:
- The election must be made within 4 years of the end of the tax year in which the first remittance basis claim is made
- The election is irrevocable
UK Inheritance Tax Position
UK domiciled individuals are liable to Inheritance Tax (IHT) on their worldwide assets. However, non-UK domiciled individuals are only liable to UK IHT on their UK situs assets.
In addition to income tax and capital gains tax, the deemed domicile rules as noted above apply for IHT. Therefore, once an individual has been UK resident for 15 out of the previous 20 tax years, they become liable to IHT on their worldwide assets.
For individuals who are not UK domiciled (and not deemed UK domiciled), it is possible to set up an Excluded Property Trust (EPT). A Trust which is set up by a non-UK domiciled settlor which contains only non-UK situs assets is not subject to UK IHT.
Therefore, an individual who will soon become a condition B deemed domicile, may want to consider setting up an EPT. This will shelter their non-UK assets from IHT, as this treatment continues once the individual becomes deemed domiciled. This is however unfortunately not the case for condition A deemed domicile individuals.
Domicile: US Aspects & Considerations
As referred to earlier in this page, there are specific points for a US citizens resident in the UK need to bear in mind when determining whether or not to claim the remittance basis.
The key factor is that US rules require US citizens and greencard holders to file US returns no matter where they are living in the world. As a result where income is not being taxed in the UK, this may simply result in a US tax liability arising on these amounts.
The decision as to whether to pay tax on a remittance basis therefore needs to be a global one taking into account a number of considerations such as:
- Difference between the US and UK tax rates on the relevant income
- Level of existing available foreign tax credits for UK purposes
- Any differences in the way the taxable income may be calculated or viewed for UK and US tax purposes eg rental income and LLC distributions
Once the taxpayer has been resident in the UK for long enough to pay the remittance basis charge, in addition to the above it’s important to consider the deductibility of the remittance basis charge for US foreign tax credit purposes.
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